Since Forbes hired me in 1995 to write a legal column, I’ve taken advantage of the great freedom the magazine grants its staff, to pursue stories about everything from books to billionaires. I’ve chased South Africa’s first black billionaire through a Cape Town shopping mall while admirers flocked around him, climbed inside the hidden chamber in the home of an antiquarian arms and armor dealer atop San Francisco’s Telegraph Hill, and sipped Chateau Latour with one of Picasso’s grandsons in the Venice art museum of French tycoon François Pinault. I’ve edited the magazine’s Lifestyle section and opinion pieces by the likes of John Bogle and Gordon Bethune. As deputy leadership editor, these days I mostly write about careers and corporate social responsibility. I got my job at Forbes through a brilliant libertarian economist, Susan Lee, whom I used to put on television at MacNeil/Lehrer NewsHour. Before that I covered law and lawyers for journalistic stickler, harsh taskmaster and the best teacher a young reporter could have had, Steven Brill.

Why Hostess Had To Die

Hostess Brands has now shut down and is going into final bankruptcy liquidation, killing 18,500 jobs and selling off its factories, brands and other assets. Yesterday bankruptcy judge Robert Drain had management and labor join him for a last mediation session aimed at brokering a new contract, but the session was abandoned last night.

What drove Hostess to this point?

As the popularity of junk food faded a decade ago, the company, which stretches back 82 years, struggled with rising labor and commodity costs. It filed for bankruptcy for the first time in 2004.

In 2009, it came out of bankruptcy under the name Hostess Brands, named for its most popular division. Hostess made an effort to adapt to changing times, introducing new products like 100-calorie Twinkie Bites. But it also had new private equity backers, which loaded the company with debt, making it tough to invest in new equipment. At the same time, the workforce was heavily unionized and had very high labor costs. Hostess had a net loss of $1.1 billion in fiscal 2012, on revenues of $2.5 billion. In January, the company filed for Chapter 11.

But who was ultimately to blame for the company failure? Here at Forbes, Leadership contributor Adam Hartung had a provocative piece on Sunday where he fingered management. In its most recent bankruptcy filing, writes Hartung, the company imposed “draconian cuts to wages and benefits.” This was unrealistic and damaging, he says, “tantamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price.” The company also kept trying to prop up its old business of obsolete products, failing to cook up more palatable foods with higher margins. Then it scapegoated the unions.

Today Forbes has a piece by Hank Cardello, a senior fellow at the Hudson Institute, and author of Stuffed: An Insider’s Look at Who’s (Really) Making America Fat. Cardello agrees with Hartung that Hostess management is to blame, for failing to alter its products amid dramatic changes in consumer tastes. Other junk food producers, including Coca-Cola and General Mills, have adapted and thrived.

Hostess should have picked up on changing consumer tastes years ago, writes Cardello, and begun reinventing its product line. The company could have even kept the iconic Twinkie, which still has its fans, if it had added more nutritional products. Cardello is a former marketing director at Coca-Cola, where he worked when the company introduced Diet Coke in 1983, so he knows of what he writes.

Other writers, including Andrew Ross Sorkin of The New York Times, Holman Jenkins of The Wall Street Journal, and John Carney of CNBC, have described the inner financial dealings at Hostess and its relationship with its unions, as the reasons for the company’s demise.

Sorkin explores the notion that Hostess was “Bained,” a new pejorative that has emerged on Twitter in conversations about Hostess. That meme stems from private equity firm Ripplewood Holdings taking control of Hostess as it came out of bankruptcy in 2009. But Sorkin maintains that Ripplewood has not been a Bain-style manager, operating with the primary objective of scoring profits. Instead Ripplewood was founded by a big Democratic donor, Timothy Collins, who was trying to invest in heavily unionized, troubled companies with the objective of turning them around.

Sorkin describes how some observers have suggested that Ripplewood didn’t get enough union concessions, and also faced rising commodity prices and pressure from competitors. The bottom line, he says, is that Ripplewood is a huge loser here, instead of walking away with big profits. “So much for being Bained,” writes Sorkin. But I have to interject that Bain has made some bad deals too. Though Ripplewood’s objective may have included goals other than profit, its goal seems to me to be similar to many Bain deals—to bring in money by making changes at an ailing company.

At the Journal, Holman Jenkins says that private equity is not to blame for Hostess’s demise. Rather, “the real story is the story of two unions, the Teamsters and the Bakery union of the AFL-CIO.” As Jenkins has it, though the Teamsters agreed to givebacks to finance the latest Hostess turnaround attempt, the Teamsters held onto work rules that would have driven the company into the ground. Examples: Drivers couldn’t help with unloading, and products like Wonder Bread and Twinkies were not allowed to ride on the same truck. Jenkins says the bakers decided to strike because bakery operations were efficient compared to the delivery process, and they didn’t want to prop up a Teamster contract that would eventually bring the company down.

Carney’s piece on CNBC.com gets more into the weeds of the financial twists and turns that resulted in Hostess’s demise. He cites an excellent, long feature by David Kaplan that appeared in the August 13 issue of Fortune magazine that describes the company’s financial unraveling. In Carney’s summary, the parties most responsible for Hostess’s decision to shut down are two hedge funds, Silver Point and Monarch, which control hundreds of millions in Hostess debt and, as Carney has it, “finally decided they won’t squeeze any more filling into the Twinkie.” The funds are distressed debt investors, which buy debt of troubled companies at steep discounts. In Hostess’ case, if the unions refused to agree to major concessions, Silver Point and Monarch could not make money.

Carney explains that after Hostess came out of bankruptcy in 2009, the unions agreed to concessions that would save the company $220 million in annual labor costs. The lenders in turn agreed to make a new loan of $360 million. But that wasn’t enough to save the company. As sales declined and new products flopped, Ripplewood put more money in, as did Silver Point and Monarch, before and after the January bankruptcy filing. But then CEO Brian Driscoll abruptly quit and relations between union and management deteriorated further. In August, as Fortune’s Kaplan reports, Hostess stopped making union pension contributions. With its investment under water, Ripplewood ceased negotiating with the unions, which left workers to deal with the hedge funds. After the bakery workers went on strike, the hedge funds concluded that Hostess wasn’t worth saving, writes Carney.

So in the end, why did Hostess die? While I think Hartung and Cardello make compelling points about product innovation, I’m convinced, as Fortune’s Kaplan wrote last summer, that “the Hostess story is a microcosm of larger economic and political issues on the national stage, including the perils of debt and the inertia of unions on workplace reform.” If Hostess had come up with a fabulous, new, healthy product line two years ago, perhaps that would have helped things shift. But the company had $2 billion in unfunded pension liabilities, unions that understandably didn’t want to make further concessions, and two hedge funds and a private equity firm with pressure to get some sort of return on their investments. As Kaplan writes, Hostess had “two root problems—a highly leveraged capital structure that had little margin of safety, and high labor costs.” A line of fabulous new products could not have solved those deep problems.

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Hostess so rejected the world and our wisdom about food had chyanged any for the last 100 years.

Nothing said ‘we simply don’t get it’ better, than when you llok at the ingredients of a Twinkie or Hostess Ding Dong, and in the year 2012 the third ingredient (after chemically enhanced white flour and refined white sugar) is LARD… well.. hello.. modern times much Hostess?

Ya, they deserved to die.. it was a self inflicted death.. too bad management molested the work force so badly for so long.. the only ones I feel sorry for are the cat’s who invested so much time and their lives and talents there, only to be kicked to the curb by the very folks who bonused their own upper management out in the millions, all while telling the employees they would need to take less money for their work.

Any management who got that kind of bonus, while the company was going under, should be tossed in jail.. literally.. you don’t bonus out those who are killing your company. Totally disgusting.

Goodbye Hostess.. maybe whomever picks up your Twinkie division, can finally figure out Americans don’t want pig fat in their confections in the modern era.

Thanks for your comment. I have never been a Twinkies fan but I think a lot of people do still like lard in their diets. I think someone will buy the Twinkies division and keep selling the brand under new management, and with a broken union.

The bonuses and pay increases of upper management were less than a drop in the bucket compared to the labor costs the union imposed on the company. You may disagree with the ingredients of the product, but the fact remains that twinkies sales this year alone came out to $68 million. The unions are making America less competitive by demanding outrageous pensions and healthcare benefits that modern companies have done away with a long time ago. And how can you support such idiotic work ethics:”Drivers couldn’t help with unloading, and products like Wonder Bread and Twinkies were not allowed to ride on the same truck. ” Asking any company to survive with work requirements like that is a definite path to failure. I blame the unions just as much as I blame the upper management.

Thanks for your comment. I agree that some of the union rules made no sense. But I also sympathize with union workers, who take jobs assuming they will get certain benefits. I think ultimately Hostess’ demise had to do with ballooning debt and its lenders, both private equity and hedge funds, seeing that they were not getting a return on their investment.

The Lard isn’t in there because people like or don’t like it in their diets, it was there because it is the very least expensive (and least healthy) way to make the product.

One would be hard pressed to find lard in any major brands confections these days,, I can’t think of any off hand.. Hostess was one of the last remaining national brands, and everyone else pretty well jumped off that bandwagon 30 years ago. FOr good reason.

As a bit of a nutritionist that has followed food trends and fad diets for many moons, Hostess has astonished me for decades.. I am not new to the ‘what’s up with Hostess’ (ingredients) gig.

Tell 99% of the people that are eating a Twinkie ‘did you know that white cream filling is pure ground up pigs fat and sugar’ .. and they will stop eating.

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I admit to being aloof when it comes to the economics of their internal operations.. but as a cat who promotes conscious eating choices every chance I get, this tiff with Hostess has actually delighted me.. Like I (like you) say, I am sure Twinkies will get picked up (best bet in Vegas) and odds are iffy another national bakery is going to reintroduce lard into their establishment after re standardizing to get it out.. Certainly it will ‘come up’..

Just my immediate random thoughts (prone to change on a moments notice) anyway..

chas you dont speak for america, so shut your commie mouth. in america we eat whatever we want, not what the government deems suitable for the masses to consume. im enjoying a delicious twinkie now, and its a hell of a lot better than any vegan tofu hummus terrorist food people like you are trying to force other people to eat.

Management always forgets they are the ‘role model’ in a company. If they are asking concessions and giving themselves huge increases when a company is close to the brink, the ‘workers’ whether unionized or not start to feel exploited or think the company is lying about the finances. After all, if you need concessions, how come you get a huge pay increase? All of this goes to setting the stage and it is my understanding that the unions had been negotiating through these various ‘bankruptcy’ sessions for quite some time. If a company is really in trouble, the cuts need to be across the board.